J.P. Morgan Iraq and MENA Trade Forum Tuesday 25 September Presentation

Middle East and North Africa Trade Forum
Tuesday 25 September, 2012
J.P.MORGAN
MIDDLEEASTANDNORTHAFRICATRADEFORUM

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Farrukh Siddiqui
Global Trade Head, Middle East and Africa, J.P. Morgan
W E L C O M E B A C K R E M A R K S
J.P.MORGAN

Agenda
Tuesday September 25
09:15 Welcome Back Remarks
Farrukh Siddiqui, Global Trade Head, Middle East and Africa, J.P. Morgan
09:30 Executing Trade Differently - New Initiatives
Impact of Basel III on Global Trade
Remaining aware of changes to capital rules related to the trading book, securitizations and counterparty credit
risk enables clients to manage risks and liquidity while keeping costs at bay.
Global Network Trade
Leveraging global presence and global relationships creates value added solutions for customers and
suppliers worldwide through the global trade corridors.
Online Trade Finance: Essential and Inevitable
Web-based global platforms help clients simplify and gain visibility into the entire range of their trade activities
lowering costs and optimizing cash flow.
Saadat Khan, Global Trade, Middle East and North Africa, J.P. Morgan
Zeeshan Khan, Global Trade, Middle East and North Africa, J.P. Morgan
10:30 Refreshments
11:00 Accessing Alternative Sources of Liquidity with Islamic Trade Finance
The role and benefits of Islamic Finance within trade continues to evolve as the number of new entrants increases. With
this evolution it is important to remain mindful of regulatory challenges and liquidity limitations whilst simultaneously
expanding reach.
Gohar Bilal, Islamic Product, Middle East and North Africa, J.P. Morgan
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Agenda
11:45 Panel Discussion: Trade Challenges and Opportunities
Analysis of the appetite and primary benefits of banks providing trade finance in the MENA market and developing intra-
regional trade. How transactions undertaken by local banks remove the political and payment risk and confirming banks
can unlock the potential of emerging markets through guarantee provision.
Moderator: Jossan Maalouf, Global Trade, Middle East and North Africa, J.P. Morgan
Panellists: Ekrimeh Mahasneh, CIC
Diaa Abu Hijleh, Manaseer Group
Daho Abidat, Vitol
Darine Sawma, Demco Steel
12:45 Closing Remarks
Asif Raza, Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan
Farrukh Siddiqui, Global Trade Head, Middle East and Africa, J.P. Morgan
13:00 Lunch
Al Saraya Restaurant
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Saadat Khan,
Global Trade, Middle East and North Africa, J.P. Morgan
E X E C U T I N G T R A D E D I F F E R E N T L Y
- N E W I N I T I A T I V E S
J.P.MORGAN
Zeeshan Khan,
Global Trade, Middle East and North Africa, J.P. Morgan

Agenda
 Impact of Basel III on Global Trade
 Global Network Trade
 Online Trade Finance : Essential and Inevitable
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I M P A C T O F B A S E L I I I O N G L O B A L T R A D E
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Basel III: What is it all about?
 According to The Basel Committee on Banking Supervision (BCBS), the Basel III proposals have two
main objectives:
 Improve banking sector’s ability to absorb shocks – strengthen global capital and liquidity rules in
the event of financial and economic stress
 Improve risk management and governance – strengthen banks’ transparency and disclosures
Objectives
Basel III
Mitigate Risk
Strengthen capital requirements
for counterparty credit risk
exposure arising from
derivatives, repos and securities
financing activities
Liquidity
Implement new liquidity standards:
■ Short term – Liquidity Coverage Ratio2 ≥ 100%
■ Long term – Net Stable Funding Ratio3 ≥ 100%
Capital
Raise quality, consistency and transparency
of the risk weighted capital base from 8%1 in
2012 to 10.5%1 in 2019
Cyclicality
Hold additional capital to limit
impact to banks and associated
counterparties in the event of a
crisis
Leverage
Limit leverage ratio to 3% (i.e. total
assets (on & off balance sheet) should
not exceed 33 times bank’s tier 1
capital
≥ 100%
Stock of high quality liquid assets
Net cash outflows over a 30-day period
2.Liquidity Coverage Ratio =
Available amount of stable funding
Required amount of stable funding
≥ 100%3.Net Stable Funding Ratio =
1. Source (www.bis.org) – Basel III: A global regulatory framework for more resilient banks and banking systems (Annex 4 phase in arrangements). 10.5% includes2.5% capital conversation buffer
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What is Basel III?
Basel III reforms were introduced to strengthen global capital and liquidity rules with the goal of promoting a more
resilient banking sector. The objective of the reform is to improve the banking sector’s ability to absorb shocks
arising from financial and economic stress.
2012 2013 2014 2015 2016 2017 2018 2019
RiskWeightedAssets(RWA)
2% 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%
2%
1%
1.5%
1.5% 1.5% 1.5% 1.5% 1.5%
4% 3.5% 2.5% 2% 2% 2% 2% 2%
0.6%
1.2% 1.9% 2.5%
Tier 1 Other Tier 1 Other Capital Capital Conservation Buffer
8%
10.5%
Stock of high quality liquid assets
Net cash outflows over a 30-day period
≥ 100%
Available amount of stable funding
Required amount of stable funding
≥ 100%
Capital Ratio1 Liquidity Coverage Ratio (LCR)
Net Stable Funding Ratio (NSFR)
Promote short term resiliency of a bank’s liquidity
profile by ensuring it has sufficient high quality
assets to survive an acute stress scenario (30 days)
Promote resiliency of a bank’s long term funding
structure by ensuring that it holds stable medium
and long term funding for its asset profile (> 1 year
horizon)
Promote focus on common equity and retained
earnings as the highest quality components of a
bank’s capital
1. Source (www.bis.org) – Basel III: A global regulatory framework for more resilient banks and banking systems (Annex 4 phase in arrangements)
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Euro Finance Study
Impact of Basel III on your company’s performance
1. 303 European corporate treasury professionals
Source – The impact of Basel III on corporate performance, EuroFinance, Jan 17, 2012
40%
51%
9%
40%
57%
3%
0% 10% 20% 30% 40% 50% 60%
No Impact
Negative Impact
Positive Impact
All European Respondents Western European Corporations1
Corporations should be more prepared for the potential negative impact from the introduction of
Basel III
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Impact of Basel III – Capital and Liquidity Shortfall
Basel III – Impact and Response to the Banking Sector
€1.1
€1.3
€2.3
€0.6
€0.6
€2.2
€1.7
€1.9
€4.5
Europe U.S. Total
Capital
Short Term Liquidity
Long Term Liquidity
Source – Global Insights (McKinsey analysis)
How are banks responding?
Operational balances are now an important component of the ―corporate – bank‖ relationship;
credit will be closely scrutinized and will get more expensive
 Need to raise new capital
 Business structuring –
 Shed unprofitable businesses
 Curb lending in markets
 Sell business lines
 Scale back regional expansion plans
 Capital and liquidity efficient products
 Financial restructuring – improve quality of
capital and reduce capital needs
 Reduce costs – layoffs, reduced capital
expenditure (technology, customer service,
expansion)
 Use stock for dividends, salaries, bonuses
In Trillions
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An External View: Impacts of the Proposals
SOURCE: Basel III: Issues and Implications (KPMG Analysis)
• Weaker banks will get crowded out
• Significant pressure on profitability and on ROE
• Change in demand from short-term to long-term funding
• Legal entity reorganization
Impact on Individual
Banks
• Reduced risk of a systematic banking crisis
• Reduced lending capacity
• Reduced investor appetite for bank debt and equity
• Inconsistent implementation on the Basel III proposals
leading to international arbitrage
Impact on the Financial
System
• Basel III would reduce ROE by 4 percentage points for
the average bank in Europe and would reduce ROE by
3 percentage points for the average bank in the US.
• To meet capital requirements for 2012, banks must
increase lending by 15bps on average.
Causes
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Bank Selection Criteria in the Basel III Environment
III. Capability
and
Resiliency
II. Deposits
 What level of deposit should I leave at the
bank to manage wallet share?
 Am I managing my counterparty risk?
 Am I within my investment guidelines?
 Are deposits tied to operational business?
 Can my bank hold my non operational
balances (negative impact on LCR)?
 Do I need to revise my investment guidelines
to adjust for Basel III?
 Does the bank have the capability to serve
my cash management needs?
 Can I get good customer service?
 Will the bank continue to invest in the
transactions services business?
 Will Basel III impact on intraday lines raise
the cost of payment services?
 Can the bank maintain a governance
structure to ensure resiliency and continuity
in operations?
Bank Selection – “Traditional” Criteria Bank Selection – “Basel III” CriteriaEvaluation
 Is the bank a lead provider?
 Is the bank in my credit revolver?
 Can the bank maintain it’s credit appetite
during times of stress?
I. Credit
 Can the bank support my credit needs and
meet higher capital ratios under Basel III?
 Can the bank continue to provide credit on to
support my global supply chain (e.g. SCF)?
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Assessing the Implication of Basel III on Your Entity
 Banking partners will value operational balances
 Deposits tied to operating business are valuable
(i.e. custody, clearing and core cash)
 Yields on non operational balances will be under pressure and
of less value to your banking partner due to higher leverage
cost
Corporate - Cash Surplus Entity
 Bank funding will be an important component to the overall
relationship (higher liquidity and capital requirements)
 Funding will increase for committed / uncommitted liquidity
lines, specialized financing with high risk weights, etc.
 Trade finance projected to be more as a risk mitigation tool.
Additional capital and liquidity requirements will increase the
cost to banks (i.e. leading to an increase in financing costs)
 30-day commercial paper market is expected to shrink
Corporate - Cash Deficit Entity
Basel III
Ready
Basel III Readiness – Action Steps
 Re-evaluate your funding
needs
 Get visibility to your
corporate liquidity
 Evaluate your banking
partners liquidity offerings
based on the regulatory
changes
 Identify counterparty
exposure
 Banking partner
 Customers
 Suppliers
 Quantify exposure & risk
 Ensure compliance with
internal policies
 Identify top banking
partners
 Ensure liquidity and
transactional support
 Develop contingency and
business continuity plan
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 Trade Business models are driven by the transfer of assets from corporate balance sheets to bank balance
sheets
 Growing bank balance sheets and increasing leverage leading up to 2008 made these businesses attractive with
strong margins
 Post crisis, the old model has been discredited and banks will not be able to rely solely on their balance sheet to
meet corporate demands
 The new regulatory regime will also play a fundamental role in reshaping how banking including trade finance is
implemented going forward
 Distribution strategies will become increasingly important
 Partnerships between banks will become increasingly important
New Approach to Trade Business
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 In addition to asset quality, U.S. banks’
capital position has significantly improved
 Strong capital is allowing banks to ease
lending standards and make more loans
 Improving asset quality is allowing for
organic earnings generation to flow directly
into retained earnings as banks hoard cash
and supply less credit into a deleveraging
economy
 Capital hoarding and gradually improving
asset trends have led to significant balance
sheet improvement in the U.S. banking
industry
 As an example, the major U.S. banks have
basically doubled their Tier 1 common
equity ratio (under Basel I) over the past
two years
Capital Positions of U.S. Banks Significantly Improved
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G L O B A L N E T W O R K T R A D E
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Importing Regions Exporting Regions
SOURCE: ICC Global Trade & Finance Survey 2012
Volume and Value of Average Letters of Credit Issued
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Key Trends in Commodity and Trade Finance
 As western demands stall, trade between developing countries (APAC) is growing
 According to SWIFT, nearly 2/3 of the total LCs issued were in the APAC region
 After the financial crisis, international banks looked more carefully at their risks, and withdrew from, or
limited their exposure to trade finance
 As a result, a funding gap estimated $250 billion per annum opened up, creating an opportunity for
new players to fill the gap
 Stressed by competitive and regulatory pressures, global banks have a few changes:
 First, by investing in technology, banks allow their clients to initiate and conclude transactions
electronically and combine trade products with cutting edge automated cash and liquidity solutions
– Giving banks valuable cross-selling opportunities that enable them to price more competitively
 Secondly, banks are increasingly offering services on the ground in key local markets, providing an
attractive mix of international reach and local understandings
Trend 1: Geographic – The Rise of the East & South-South Axis (APAC)
Trend 2: New players – Filling the Void
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Trade Finance Innovation
Post Import Finance
supported by
Precautionary
Guarantee:
• It is a bank’s unique
expertise to tap Trade flows
which are on open account
terms and do not involve
Documentary Credit, a
growing case with Middle
East based importers.
Banks’ Sales, Product and
Legal experts customize
financing of such trade
transactions by involving
Avalizing banks to issue
Precautionary Guarantees.
This is simple and time
efficient and results in cost
advantages to importers.
• Example: Import of US
made cars
Network Trade:
• Banks take advantage of our
unrivalled global
relationships with exporters,
importers and banks to bring
the benefits of risk mitigation
to Trade transactions,
reducing financing costs and
providing end-to-end
structuring for all parties.
• Example: Import of
Automobiles from Asia,
Electronics, Infrastructure
Post/Pre Import/Export
Swift Finance:
• This unique offering is
designed to finance the
Trade payables of our
partner banks, helping them
better serve their clients’
Trade needs. Banks may
work on individual large
transactions such as
payment under an SBLC /
Open Account or for a group
of Trade transactions for
well- known corporate
names. The repayment of
this finance is tied to the
cash conversion cycle of the
underlying Trade.
• Example: Import of Oil
against SBLCs confirmed
by a Bank and finance
provided directly to the
issuing bank for onward
payment
ECA Backed
Financing:
• The year 2009 proved
strong relationships and
structuring abilities with
US Ex-Im, as banks
helped regional aviation
players raise financing
for their purchase of
Boeings. The ECA
finance capability is also
being enhanced in the
region through inclusion
of ECGD-backed
financing for Airbus
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Trade Finance Deals
Deal Type Situation Solution
Import Finance Large MENA company which purchases Soft
Commodities regularly from US Suppliers on
LCs requires payment terms up to 180 days
while suppliers asks sight payment
An International Bank facilitates the
purchase of commodities from the US
producer through LC
Confirmation/Refinance.
Risk Distribution A large Oil Company procuring Oil from World
Majors requires confirmed LCs for its large LC
Values
An International Bank confirms the
Credit and distributes the risk in
regional/ international markets to
provide the best pricing to the applicant.
Open Account Finance Large MENA Auto distributor purchases
Autos/Spares from Asian Manufacturer on
open account at CAD basis
An International Bank facilitates the
purchase of through Avalized
Promissory Note Financing.
Syndicated Trade
Facility
A Telecom Company with many overseas
subsidiaries which have import requirements
dealing with several banks
An International Bank’s Trade Finance
leads the Syndicate for consolidation of
the trade finance facilities which will
enable the parent to finance its imports
Arranger of SBLC
Syndication
A Holding Company with many overseas
subsidiaries has SBLC requirements dealing
with several banks, several security packages,
differing pricing levels
An International Bank’s Trade Finance
leads the Syndicate finance facilities
with a panel of fronting banks, issuing
banks and participating investor banks
Financing Under Direct
Pay SBLC
Large Auto Accessory Company wished to
offer solution for its 100s of millions worth of
sale through regional distributors against an
SBLC cover
An International Bank proposed a
financing under Standby Letter of Credit
(―SBLC‖) partnering with a bank which
provided the SBLC allowing drawdown
under the SBLC
ECA Covered Financing An Airline in the region sought to raise
financing for its aircraft purchase
An International Bank arranged and
raised Long term financing backed by
US Exim Bank support
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O N L I N E T R A D E F I N A N C E :
E S S E N T I A L A N D I N E V I T A B L E
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 A web-based global platform that helps clients gain visibility into the entire range of their trade activities — from
purchase order to payment. The net effect is improved efficiency, accelerated payments, reduced expenses, less
risk, a more streamlined trade-related payables and receivables process, and provides unparalleled visibility and
control of the financial supply chain.
 Easy to use, implement and is highly scalable, processing more than $9 billion in global transactions per year.
 They also, automate the creation and delivery of trade documentation, improve and accelerate the accuracy of
international trade documentation, accelerates payment and reduces days sales outstanding (DSO), cuts direct
documentation and payment processing costs, integrates seamlessly with your existing inventory management or
ERP systems, increases operational efficiencies and collaboration among all users, including remote employees,
financial institutions and third-party service providers and provides an immediate ROI.
 Web-based platforms have also embraced the mobile world, providing businesses with a secure portal for
receiving notifications and authorizing payments.
 Web-based platforms make the corporate processing of LCs much more efficient by eliminating all manual
activities previously associated with such transactions.
 Acknowledged as a "green" solution, it eliminates costs associated with the creation of LCs and guarantees and
enhances the paperless office concept.
 Another web-based platform is an innovative document imaging and workflow application specifically developed
for processing trade finance transactions, offering banks a cost-effective solution to implement strategic,
paperless operating models.
Online Technology in Trade Finance
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 Modules suiting both Corporates or
Financial Institutions
 Letter of Credit, LC Reimbursement and
Export Collections Modules - Gain access
to all your transactions on a single platform
for greater transparency and convenience
 Internet access eliminates geographical
and time barriers, contributing to
improved workflow management
 On-line real-time access to status and
information on your transactions – this
allows you to closely track the progress of
your transactions as well as documents, and
in turn use this as a value-added service for
your customers
 Easy export of data to applications to
facilitate customised reporting – Statistical
and text downloads are easily exported to
Crystal Reports, Microsoft Word and Excel
applications for quick and easy reconciliation
 Ability to view SWIFT-related transaction
messages
 Secured e-mail capability to communicate
with J.P. Morgan
Wide selection of management reports
Online reporting enquiry with filter criteria and
refresh function. Trade Channel offers over
100 reports that enable you to monitor
transaction status, manage risk profile,
measure performance and project cash flow
and funding needs.Letter’s of Credit: Import & Export
Status and Monitoring of transactions:
 Issuance of import LC’s
 Receipt of export LC advises
 Issuance and receipt of
amendments
 Payment advice, credit / debit
advices
For your Letter of Credit Reimbursement
Monitor status of your L/C reimbursements:
 Your reference number
 Available balance under each
reimbursement authority
 Reimbursement authority Acknowledgement
 Credit/ debit advice
 Pre-debit notificationFor your Export Collections
Monitor status of your export
collections:
 Days outstanding for each item
 Date of last tracer sent
 Collecting bank
 Courier pick-up And delivery details
 Credit/ debit advice
Benefits of Using a Web-Based Platform
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Client is one of the world's largest manufacturers of float glass and fabricated glass products that also manufacture and
supply the automotive industry with a variety of exterior products. The client has become a significant player in the
building materials distribution business as they are amongst the world's largest producers of mirrors.
Overview
The client opted to centralize its financial operations in Europe whilst looking for an established Trade Services provider.
The Commercial Bank received an RFP emphasising the centralization yet being able to service continental Europe.
Further conversations with the client identified a need for uniform processing, an opportunity for cost reduction and a
need for a reporting tool.
Challenge
Primary challenge was to take the standard Trade information a step further and beyond the standard solutions
proposition. Where can we assist, alleviate, support and at times even take over part of the documentary trade process?
Smaller challenges were encountered during the implementation period due to local legislation.
Solution
 Consolidation of Trade Export Receivables enabling Guardian to focus on core competencies
 Timely payment due to combination of activities helps to ensure correct documentation (i.e. < DSO)
 Reduction of costs (operational and banking) for Guardian
Export Letters of Credit
 Advising / Amendment / Negotiation / Confirmation
 Screening vs. Guardian templates and J.P. Morgan to ensure workability
Document Preparation
 Creation & monitoring of documentation applicable to Export LC’s
 Liaising with 3rd parties (freight forwarders, legal counsel, etc.)
Export Documentary Collections
 Creation / Remittance / Amendment / Settlement
 Monitoring
Document Preparation
 Creation & monitoring of documentation
 Liaising with 3rd parties (freight forwarders, legal counsel, etc.)
+
+
=
Case Study: Corporate Trade Export Receivable Consolidation
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Gohar Bilal
Islamic Product, Middle East and North Africa, J.P. Morgan
A C C E S S I N G A L T E R N A T I V E S O U R C E S
O F L I Q U I D I T Y W I T H I S L A M I C T R A D E
F I N A N C E
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Agenda
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 Liquidity
 How Islamic Finance fits into all this
 Islamic Finance – The Big Picture
 Trade Finance
 Gulf Corporation Council Fundamentals
 Trade Finance Growth in Gulf Corporation Council
 Growth of Trade Finance Products for Islamic Finance
 Appendix 1: Trade Products

There has been a fundamental shift in the
approach for checking the financial health of
banks and corporations.
―Liquidity‖ is one of the main focuses for all market
practitioners including regulators, central banks,
financial institutions and corporations.
For example: in 2010, the cash accumulation
by the corporates in the US was circa $2
trillion, the highest in 40 years with 7 cents of
every $ of corporate assets invested in liquid
assets.
―Liquidity‖ has emerged as the core focus as a result of recent global crises
Bank Corporates
Use of Liquidity Use of Liquidity
Maintain cash Working Capital
Loans with less than one year
maturity
Inventories
Placements with Central Bank
/Financial Institutions
Source of Liquidity Source of Liquidity
Deposits Cash from its business
Borrowing from Banks
Equity – Buffer for loss Equity Buffer for loss
Liquidity is a quick conversion of asset into cash - which is the most liquid asset for banks and corporates
―How easily cash is accessible and how quickly cash equivalent assets can be sold to get money‖
Liquidity for banks and corporates is like water to humans i.e. “a must to survive”
What is Liquidity?
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Banks play the critical role of financial intermediaries between money providers (depositors) and borrowers,
allowing a smooth flow of money and meeting the needs of each side.
Liquidity - Banks - Corporates
Banks are Intermediaries between Source and Use of Liquidity
 Confidence of the depositors result in a stable funding source
 Stable funding allows the banks to provide loans
 To maintain their reputation, Banks must provide confidence to depositors that they will lend to entities with low default risk
Source of Liquidity
 Depositors are the main source
of cash / liquidity for the banks
 Depositors want to have the
confidence in the bank that
they will not lose their money
 If they feel otherwise, it would
result in a ―run on the bank‖
Banks
Banks
Depositors Corporates
Central Bank
Bank and Corporate
Regulators
Basel Requirements
Users of Liquidity
 Banks lend to corporates based
on their sound business
performance and low default risk
 One of the key determinant of
this is having ―sound cash flows‖
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 Policemen for companies are government bodies that impose guidelines and provide a
policy book for each sector
 Like the Banking sector, there is no “generic health check” that must be maintained by all
companies ―irrespective of their sector‖
 Regulators and Central Banks are the policemen for Banks
 The ―Global Policy Book‖ for Banks are the Basel requirements.
 Core focus of Basel is on:
 Liquidity
 Capital
 Credit Risk Weighting
Liquidity
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Most people argue that Islamic finance is important and will grow because
―it is an ―alternative source of funding‖ but
the fundamental reason why Islamic finance is important and will grow is that the
“core values of Islamic Finance addresses what regulators, banks, corporations and individuals are
currently questioning”
DEBT and LIQUIDITY !!
The recent crises is making practitioners re-think the model – For example:
 Public perception of debt is changing – same is true for governments, banks and regulators
 People are looking at debt from a grass root level and so is everyone one else
 There is more focus on saving, liquidity, staying within means, low leverage
 All are “Going Back To Basics” – focusing on basic commercial transactions and the simplest form of
basic commercial transaction are ―Trade Transactions‖
Trade is at the heart of Islamic finance!
How does Islamic Finance fit into all this?
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Global Islamic Finance Market – By Assets
 Globally Islamic Finance is estimated to be $1.1 trillion which has grown at an average of 15% in the last
5 years
 As per Deutsche Bank Nov 2011 estimates, Islamic finance industry will grow to $ 2 trillion by 2016
 Growth is mainly driven by:
 Middle East - Bahrain, Kuwait, Qatar, Saudi Arabia, UAE and now emerging in Oman
 Asia – Malaysia, Brunei and now emerging in Indonesia
 While existing in Europe in the UK and Luxembourg, countries like France and Ireland have reformed
their laws to attract Islamic Finance
 Other countries like Australia, India, Hong Kong are reviewing their regulatory, legal and tax regimes
to make them Islamic finance friendly
2007 2008 2009 2010 2011 2012
Total Assets ($ million) 500 639 822 895 939 1,100**
y-o-y growth (%) 23% 22% 22% 8% 4% 17%
Source: US Congress Research Service, Maybank Islamic Malaysia, The Banker , NCB and PWC
Islamic Finance – The Big Picture
J.P.MORGAN

The Big Picture
 There were 614 registered Islamic Financial
Institutions globally in 2010 of which 245 (40%)
were in the Gulf Corporation Council* (GCC)
 GCC holds 42% i.e. the largest share of Islamic
$1.1 trillion assets
 Globally, KSA (Kingdom of Saudi Arabia) is the
largest Islamic market (15%) followed by
Malaysia (12%) excluding Iran
 Other countries that dominate the Islamic market
include UAE, Bahrain and Qatar
 Oman is now also focusing on Islamic finance
* Per NCB Dec 2011 report ―The Competitiveness Review‖
Other, 1%
America,
Europe,
Australia,
5%
Asia 15%
Non GCC
MENA,
37%
GCC 42%
Asset by Region - Islamic Finance – 2010
J.P.MORGAN

Islamic Finance – Geographic Breakdown 2010
Commercial
Banks
74%
Investment
Banks
10%
Sukuk
(Islamic
Bonds),
10%
Takaful
(Islamic
Insurance)
1%
Islamic
Asset Mgmt
Funds
5%
Islamic Assets by Type – 2010
Iran
35%
Saudi
Arabia
15%
Malaysia
12%
UAE
10%
Kuwait
8%
Qatar
4%
Bahrain
5%
UK,
2%
Turkey
3%
Others
6%
 Saudi Arabia is the main hub for Islamic finance followed by Malaysia, UAE, Kuwait, Bahrain and Qatar. Although Iran
may have the highest proportion, according to the November 30 2010 report by US Congress Research Services its growth
will be limited by International sanctions and increased scrutiny from a compliance perspective.
 Commercial banks are the drivers of Islamic finance
 Assets are mainly cash, interbank and corporate loans that are based on commodity murabaha
Source: National Commercial Bank and Saudi Arabia General Investment Authority: ―The Competitiveness Review‖; December 2011
J.P.MORGAN

The core Islamic Finance principles are build around Trade which is the simplest form of
commercial transaction
Trade is fundamentally based on the following:
 Sound economic environment
 Sound Financial Sector for Credit availability
How does the Gulf Corporation Council (GCC) environment fare for Trade Finance?
Trade Finance: Simplest form of basic commercial transaction are ―Trade
Transactions‖
J.P.MORGAN

GCC Fundamentals: Total 57 Organization of Islamic Corporation Countries with
Middle East and North Africa and GCC subset
AFRICA
42%
24
ASIA
25%
14
EUROPE
2%
1
SOUTH AMERICA
3%
2
GCC
28%
6
MENA excl GCC
28%
10
MENA
28%
16
 The Organization of Islamic Cooperation (OIC) is an international organization comprising of 57 countries across 4
continents of the world from South America to Far-East Asia
 In 2010, the OIC countries formed 23% of the world population and contributed 11% to world output
 The total GDP of the OIC countries has grown constantly over the period 2006-2010 from $6.3 trillion in 2006 to $8
trillion in 2010
 In 2010, the top 10 OIC countries by the volume of GDP accounted for as much as 71% of the OIC total output
 Of the 57 countries, 16 countries are from the MENA region, including 6 countries from the GCC
Source: Annual Economic Report on the OIC Countries 2011; The Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC)
J.P.MORGAN

GCC Fundamentals: Economic Environment is fundamentally sound for Islamic
Trade Finance
Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates
GDP 2008 27.2 138.6 70.7 117 585 242.3
GDP 2009 28.3 132.6 72.1 128.3 593.9 236.8
GDP 2010 29.7 136.5 75.8 150.6 622 246.8
2010 GDP as % of Total GCC 2.35% 10.82% 6.01% 11.94% 49.31% 19.57%
2010 GDP as % of OIC 0.37% 1.71% 0.95% 1.89% 7.79% 3.09%
0
100
200
300
400
500
600
700
USDBillions
2008 - 2010 GCC GDP
 GCC economies have largely been resilient to the global economic crisis, led by Saudi Arabia, UAE and Qatar
 GCC fiscal position is robust. Total 2012 budget surpluses is estimated to range between 10% in the UAE, 15% in Saudi Arabia and
25% in Kuwait
 IMF recently projected Saudi Arabia will grow at 6% in 2012
 Qatar’s overall real GDP growth to remain in the vicinity of 8% for 2012
 Kuwait is estimated to realize a 6% growth rate in 2012
 UAE, Oman and Bahrain will likely realize more moderate economic growth rates at 5%, 5% and 3% respectively in 2012
Source: The Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) : Annual Economic Report on the OIC Countries 2011;
Gulf Investment Corporation: GCC Monthly Article; September 2012;
J.P.MORGAN

GCC Fundamentals: Economic Environment is fundamentally sound for Islamic
Trade Finance
695,876
431,618
571,952
-404,098
-313,769
-347,064
-600,000
-400,000
-200,000
-
200,000
400,000
600,000
800,000
2008 2009 2010
USDMillions
2008 - 2010: GCC Trade Imports and Exports
GCC Total Exports GCC Total Imports
 2010 world trade was $30.5 trillion vs. $25.1 trillion in 2009
 In 2010, along with the global trends, total trade of OIC countries
rebounded to $3.2 trillion, increasing the trade share from 9% in 2006 to
10%
 In 2010 Malaysia and Saudi Arabia combined accounted for over 25% of
the total exports from OIC countries
 In 2010, 76% of the intra-OIC exports were done by only 10 OIC countries
Saudi Arabia led with $35 billion (14%) of the total intra-OIC exports,
followed closely by United Arab Emirates with $35 billion
 In 2010 GCC aggregated trade balance (exports less imports) was the
largest in the world
 In 2011, massive trade surplus in the GCC was estimated to be $520billion
Saudi Arabia was responsible for almost half of the total surplus ($245
billion) followed by the UAE ($94 billion) and Qatar ($79 billion)
 The GCC trade surplus is forecasted at average $493bn in 2012-13
Reserves
 The world total reserves –excluding gold– amounted were $9 trillion in 2010
compared to $5 trillion in 2006
 10 countries accounted for 83% of the total reserves of OIC group in 2010
 Of this, Saudi Arabia alone, with $445 billion of reserves, accounted for
32% of the total reserves of all OIC countries
2008 2009 2010
Intra-OIC Exports (bln USD) GCC Ttl 101 69 90
Intra-OIC Imports (bln USD) GCC Total 74 51 63
Exports (bln USD) GCC Total 696 432 572
Imports (bln USD) GCC Total -404 -314 -347
Net Surplus 292 118 225
GCC as % 2008 2009 2010
Total Exports (mln USD)
OIC 37% 34% 34%
WORLD 4% 4% 4%
Total Imports (mln USD)
OIC 27% 26% 23%
WORLD 2% 3% 2%
Total Reserves minus Gold (End of
Period, mln USD)
OIC 41% 39% 40%
WORLD 7% 6% 6%
Source: The Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC) : Annual Economic Report on the OIC Countries 2011;
Gulf Investment Corporation: GCC Monthly Article; September 2012;
J.P.MORGAN
GCC Robust Economic Environment

 Collective assets of the largest 50 banks in the GCC region increased by 8% reaching $1.28 trillion
 Average profit growth for these 50 banks is 13%
 Key drivers for the GCC: High oil prices, high levels of government spending
Avoidance of problematic financial instruments, such as peripheral Eurozone debt and mortgage-backed securities, that
have been weighing heavily on banks’ performance in Europe and the US
 Banking sector is driven by strongest economies Saudi Arabia, UAE and Qatar that represent 33%, 28% and 14% of the
total assets
 Per S&P, Capital Adequacy Ratios (CARs) for GCC Banks are on average 12% to 13%
 Non Performing Loans (NPLS) are low at average of 5% of the total loans
Variability in NPLs: Ranging from 1.0% in Qatar to 8.0% in the UAE. The UAE figure reflects the impact of recent regulatory
changes in accounting for NPLs and exposure to the real estate sector in Dubai
 Corporate banking continues to be strongest asset segment for foreign and local banks
 Of the top 50 banks in the GCC, 15 are Islamic and represent 20% of the total assets
 A growing demand for Shariah finance across the region which has resulted in a surge of 19% in Islamic banking
profits
NB. All figures on this slide are for YTD 2012
GCC Fundamentals: Financial Environment continues to be robust
Source: QNB Report ;GCC Banking sector shows first half results ; Sept ember 2012
J.P.MORGAN

The core reason is because Trade Finance transactions are low risk transactions
A 2005 to 2010 global survey conducted for 11 million trade transactions for 14 major banks showed that
even in the difficult market period between 2008 to 2010, Trade Finance products experienced the lowest
default rate:
 For LC’s (export and Import): default rate = 0.09% with loss = 0.03%
 For Loans (export and Import): default rate = 0.29% with loss = 0.02%
 Standby and guarantees: default rate = 0.013% with loss = 0.0007%
This is largely because 85% of global trade transactions are settled on an ―open account‖ basis
J.P. Morgan offers Islamic Open Account Financing (for Buyers) in the Saudi branch and is in the process of
rolling this out for other GCC countries.
Trade Finance Growth in GCC
Source: Cash and Trade Magazine: ICC Global Survey on Trade Finance, 2012 Report
Cash and Trade Magazine: Issue 13: Basle III: What is more to come for trade finance?
J.P.MORGAN
Demand for Islamic Trade products are following a similar evolution as that of conventional trade
products
Islamic Trade Payable Financing (Open Account) will be the preferred product, more so than LC
financing

 We anticipate that Receivables Financing will be the next growth area in Islamic finance
 There are more Islamic structures being developed for Trade Finance that will allow access
to liquidity from the capital markets
 This approach is primarily being driven by
 Basel requirements
 Capital risk weighting
 Need to access to alternative sources of liquidity
Growth of Trade Finance Products for Islamic Finance
J.P.MORGAN

Appendix 1: Trade Products
Products
Client
(Entry
Point)
Obligor
(Credit
Risk)
How is this product
known in ME Markets?
Key Client Benefit / Objective
 Supplier
Finance (SF)
Buyer Buyer
 Supply Chain Finance
 Reverse Factoring
 Confirming
 Payables Financing (Supplier
centric)
 Optimize working capital and
strengthen supplier
relationships
 Post-Import
Finance (PMF)
Buyer Buyer
 Supplier Finance
 Trade Loans
 Import Loans
 Payables Financing (Buyer
centric)
 Access to alternate source of
liquidity on B/S
 Receivables
Purchase (RP)
Supplier Buyer  Factoring
 Monetize quality receivables to
generate working capital
 Receivables
Finance (RF)
Supplier Supplier  Sales Finance
 Immediate funding to improve
cash flow
 Pre-Export
(PXF)
Supplier Supplier  Trade Loans
 Financing early in the supply
chain
 Silent
Payment
Guarantee
(SPG)
Supplier Buyer
 Bank Insurance
 Risk Mitigant Solutions
 Receivables Put
 To mitigate financial payment
and political risk on key buyers
J.P.MORGAN

Moderator:
Jossan Maalouf, Global Trade, Middle East and North Africa, J.P. Morgan
Panellists:
Ekrimeh Mahasneh, CIC
Diaa Abu Hijleh, Manaseer Group
Daho Abidat, Vitol
Darine Sawma, Demco Steel
P A N E L D I S C U S S I O N : T R A D E C H A L L E N G E S
A N D O P P O R T U N I T I E S
J.P.MORGAN

Asif Raza,
Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan
Farrukh Siddiqui,
Global Trade Head, Middle East and Africa, J.P. Morgan
C L O S I N G R E M A R K S
J.P.MORGAN

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